DUBAI (Reuters) – Business conditions in Saudi Arabia’s non-oil private sector deteriorated in August after signs of stabilisation the previous month, as demand was hurt by a sharp hike in value-added tax, a survey showed on Thursday.
The seasonally adjusted IHS Markit Saudi Arabia Purchasing Managers’ Index (PMI) declined to 48.8 from 50.0 in July, slipping back below the 50 mark that separates growth from contraction.
“After stabilising in July, the economy fell back into a downturn as firms registered a solid drop in new business, in part linked to the rise in VAT charges and ongoing social distancing measures,” the IHS report said.
Saudi Arabia, the world’s largest oil exporter, tripled VAT in July to 15% to boost state coffers badly hit by low oil prices, in a move several economists said will likely slow the economic recovery from the coronavirus downturn.
“Newly-imposed VAT changes stalled consumer spending across the Saudi Arabia economy in August, latest PMI data suggested,” said David Owen, economist at IHS Markit.
“New business was down solidly from July, as several firms commented that the sharp uptick in prices kept some customers away from markets,” he said.
Business activity and employment declined for the sixth consecutive month, although the declines were modest and the drop in employment was the slowest since May.
Due to the VAT hike, businesses reported the sharpest increase in input costs since September 2012, as suppliers increased prices of raw materials.
There had been signs of resilient economic activity in July, including annual increases in points of sales transactions and lending to the private sector, data from the central bank, the Saudi Arabian Monetary Authority, showed on Aug. 30.
To stem the impact of the pandemic on small and medium-sized enterprises, the central bank this week extended deferrals on bank payments for three more months.
(Reporting by Davide Barbuscia; Editing by Hugh Lawson)
